You know that the assets of a firm BIG are today worth 100mil. You reasonably feel that in a year they will be either worth 110mil or 90mil. You also know that a riskless zero coupon bond maturing in one year is offering today a yield of 5%. The firm has issued a zero-coupon bond that matures in one year and has a face value of 100mil.

What should be the value of this corporate bond today?

What should be its yield to maturity?

What should be the value of the equity of the firm?

Can a further analysis be done of this problem?

How are the above affected by the yield of the one year zero and the volatility of the asset value?